Yep, US companies tried to hide a ton of bad news from investors last year

When companies report earnings they
give investors a series of numbers. The most basic measure of
earnings per share is profit divided by diluted shares. This
figure is most often referred to as GAAP — or Generally Accepted
Accounting Principles — earnings.

But a
growing trend has been reporting an "adjusted," or
non-GAAP figure, which includes the company's best estimate of
things that came up during a quarter or year
that, inthe company's
judgment, were charges outside the normal course of
business.

As a result, non-GAAP earnings tend to be higher.

Earlier this week Yahoo Finance's Sam Ro wrote about the
possibility of an "illusion"
of corporate earnings propping up stocks. That is: do corporate
earnings look better because of the growing trend in reporting
non-GAAP earnings that hide charges which may not actually be all
that special?

In a note on Friday, FactSet's John Butters looked at this
"illusion" by examining the growing spread between these
figures.

And whether you think non-GAAP or GAAP earnings represent the
"true" profitability of US corporates, it is very clear
things looked a whole lot better on a non-GAAP basis last
year.

Looking at the 30 companies in the Dow Jones Industrial Average,
Butters found that 20 companies reported non-GAAP earnings with
these results, on average, coming in 30.7% higher than their GAAP
earnings in 2015. In the
2014, this spread was 11.8%.

So said another way, US
companies tried to get investors to ignore a whole bunch of
bad news last year.

FactSet

On the one hand, this suggests that companies basically fudged
their numbers last year. On the other hand, companies could
argue that extraordinary events in currency or commodity markets
were "one-time" items that should be excluded from
results.

So most of this GAAP against non-GAAP debate comes down to
philosophical as much as mathematical views on what companies
and businesses are worth or are not worth.

Maybe companies are deceiving investors, or maybe companies are
simply doing their best in a dynamic business world to represent
what they think their business is worth, which
investors are entitled to — perhaps even encouraged to — disagree
with: the first rule of investing, of course, is that you
must do your own homework.